You are considering a project for which you estimate a large initial cash outflow, followed by...
You are considering a project for which you estimate a large initial cash outflow, followed by several years of cash inflows. During your capital budgeting analysis, you realize that a state environmental law will require you to remove all underground equipment at the end of the project. Assume that the cost of complying with this law makes your Incremental Free Cash Flow number in the final year of the project negative. How might this change your use and/or interpretation of the IRR result?
| A. |
You will get a single IRR, so you should rely on Payback Rule |
|
| B. |
You will get a single IRR, so you should rely on NPV |
|
| C. |
You will get multiple IRRs, so you should rely on Payback Rule |
|
| D. |
You will get multiple IRRs, so you should rely on NPV |
Homework Answers
As there will be 2 sign changes in cash flows, you will get multiple IRRs, so you should rely on NPV
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